Introduction to CORPORATE GOVERNANCE 3.

Non-executive or Independent directors

Broad role:
Characteristics of Good Governance Same as BOD
• Participation
• Rule of Law 4. Management
• Transparency Broad role:
• Responsiveness Operations and accountability. Manage the organization effectively
• Consensus oriented
• Accountability 5. Audit committee of the BOD
• Effectiveness & Efficiency Broad role:
• Equity and Inclusiveness Provide oversight of the internal and external audit function and the process
of preparing the annual financial statements as well as public reports on
Basic Principles of Effective Corporate Governance internal control.

6. Regulators
a. BOA
b. SEC
Broad role:
Set accounting and auditing standards Ensure the accuracy, timeliness and
fairness of public reporting and financial and other information for public
companies.
Parties involved in Corporate Governance 7. External Auditors
Broad role:
1. Shareholders Performs audit of company financial statements to ensure that the
Broad role: statements are free from material misstatements
Provide effective oversight through election of board members, approval of
major initiatives 8. Internal Auditors
Broad role:
2. Board of Directors Performs audit of companies for compliance with company policies and
Broad role: laws, audits to evaluate the efficiency of operations, and periodic evaluation
Major representative of stockholders to ensure that the organization is run and test of controls.
according to the organization’s charter and that there is proper
accountability
Introduction to Ethics Professional ethics include among others:
• Integrity, impartiality, objectivity
Origin of Ethics • Professional competence
• Came from the Greek word “Ethos” which means character • Confidentiality
• Concerned with understanding right and wrong and how conduct should be • Professional behavior
judged to be good or bad • Avoidance of potential or apparent conflict of interest
• Set of moral principles or values that govern actions and decisions of an
individual or group Business ethics include among others:
• Fair competition
Characteristics and Values Associated with Ethical Behavior • Global as well as domestic justice
Characteristics • Social responsibility
Integrity Caring for others • Concern for the environment
Honesty Respect to others
Trustworthiness and Promise keeping Responsible Citizenship Common characteristics of professions
Loyalty (Fidelity) and Confidentiality Pursuit of excellence • Responsibility to serve the public
Fairness and Openness Accountability • Complex body of knowledge
• Standards of admission to the profession
• Need for public confidence
WHY IS ETHICAL BEHAVIOR NECESSARY?
- Necessary for the society to function in an orderly manner Executive Order No. 220, June 23, 2003
- Glue that holds a society together • DIRECTING THE ADOPTION OF THE CODE OF GOOD GOVERNANCE
FOR THE PROFESSIONS IN THE PHILIPPINES
WHY DO PEOPLE ACT UNETHICALLY?
1. The person’s ethical standards are different from those of society as a • General Principles of Professional conduct
whole - ethical awareness
2. The person chooses to act selfishly - ethical commitment
- ethical competency
Categories of Ethical Principles
Principles of Personal Ethics include among others: • Specific Principles of Professional conduct
• Basic justice, fairness 1. Service to Others
• Respect for the right of others 2. Integrity and Objectivity
• Concern for the right of others 3. Professional competence
• Concern for the well=being on welfare of others 4. Solidarity and Teamwork
• Benevolence, trustworthiness, honesty 5. Social and Civic Responsibility
• Compliance with the law 6. Global competitiveness
7. Equality of all Processions
Risk Management
Define RISK
• It is the probability that some future even could adversely impact the
organization.
• Risk is measured in terms of probability (likelihood) and impact
• It is exposure to the possibility of loss, injury, or other adverse effect
• This is inherent in every business, organizations and entrepreneurship
need to be willing to take risks as without risk there can be no meaningful
gain.
Process of Risk Management
1. Establishing the Context
2. Identification of potential risks
3. Risk Assessment
Risks can arise due to external or internal influences:
• External risks are exposures that result from environmental conditions that
the firm commonly cannot influence, such as the regulatory environment
and market conditions.
• Internal risks are exposures that derive from decision-making and the use
of internal and external resources, including the firm's operations and its
objectives.
Elements of Risk Management
• Identification, characterization, and assessment of threats
• Assessment of the vulnerability of critical assets to specific threats
• Determination of the risk
• Identification of ways to reduce those risks
• Prioritization of risk reduction measures based on a strategy
Classification of risk
FINANCIAL RISK
The risk which has some direct financial impact on the entity is treated as
financial risk. This risk may be liquidity risk, market risk, credit risk, market
liquidity risk, hedged positions risk, portfolio exposure risk, derivative risk,
accounting information risk and financial reporting risk.
NON-FINANCIAL RISK
This type of risk do not usually have direct and immediate financial impact
on the business, but the consequences are very serious and later do have
significant financial impact if these risk are not controlled at the initial stage.
This type of risk may include operational risk, regulatory risk, environment
risk, integrity risk and leadership risk.
Risk Associated With Investments
Business Risk
Business risk refers to the uncertainty about the rate of return caused by the
nature of the business. The most frequently discussed causes of business
risk are uncertainty about the firm’s sales and operating expenses.
Liquidity Risk
Liquidity risk is associated with the uncertainty created by the inability to sell
the investment quickly for cash.
Default Risk
Default risk is related to the probability that some or all of the initial
investment will not be returned. The degree of default risk is closely related
to the financial condition of the company issuing the security and security’s
rank in claims on assets in the event of default or bankruptcy.
Interest Rate Risk
Because money has time value, fluctuation in interest rates will cause the
value of an investment to fluctuate also. Although interest rate risk is most
commonly associated with bond price movements, rising interest rates
cause bond prices to decline and declining interest rates cause bond prices
to rise.
Management Risk
Decisions made by a firm’s management and board of directors materially
affect the risk faced by investors. Areas affected by these decisions range
from product innovations and production methods (business risk) and
financing (financial risk) to acquisitions.
Purchasing Power Risk
Purchasing power risk is perhaps, more difficult to recognize than the other
types of risk. It is easy to observe the decline in the price of a stock or bond,
but it is often more difficult to recognize that the purchasing power of the
return you have earned on an investment has declined (risen) as a result of
inflation (deflation).
Risk Associated With Manufacturing, Trading and Service Concerns
A. Market Risk
B. Operation Risk
C. Financial Risk
D. Business Risk
Potential Risk Treatments
Potential Risk Treatments
RISK AVOIDANCE
This include performing an activity that could carry risk. An example would
be not buying a property or business in order not to take on the legal liability
that comes with it.
RISK REDUCTION
Risk reduction or optimization involves reducing the severity of the loss or
the likelihood of the loss from occurring. Optimizing risk means finding a
balance between the negative risk and the benefit of the operation or
activity;
and between risk reduction and effort applied.
RISK SHARING
Risk sharing means sharing with another party the burden of loss or the
benefit of gain, from a risk, and the measures to reduce risk.
RISK RETENTION
Risk retention involves accepting the loss or benefit of gain from a risk when
it occurs.
Areas of Risk Management
The most commonly encountered areas of risk management include
1. Enterprise risk management
2. Risk Management activities as applied to project management
3. Risk management for mega projects
4. Risk management of information technology
5. Risk management techniques in petroleum and natural gas
SEC Requirement Relative to Enterprise Risk
Management for Publicly-Listed Companies
• 2.11 BOD should ensure that Enterprise Risk Management (ERM) is in
place to effectively identify, monitor assess and management key business
risks.
• Principle 12 which deals with the strengthening of the Internal Control
System and Enterprise Risk Management Framework states that: “To Overview of Internal Control
ensure the integrity, transparency and proper governance in the conduct of Internal Control
its affairs, the company should have a strong and effective internal control • It is a process designed and affected by those charged with
system and enterprise risk management framework” governance management and other personnel to provide reasonable
assurance about the achievement of the entity's objectives.
Steps in the Risk Management Process
1. Set up a separate risk management committee chaired by a board The entity's objectives have three categories
member. 1. Reliability of financial reporting
2. Ensure that a formal comprehensive risk management systems in place. 2. Effectiveness & Efficiency of operations
3. Assess whether the formal system possesses the necessary elements. 3. Compliance with laws and regulations
4. Evaluate the effectiveness of the various steps in the assessment of the
comprehensive risk faced by the business firm. Components of Internal Control System (CRIME)
5. Assess if management has develop and implemented the suitable risk • Control activities
management strategies and evaluate their effectiveness. • Entity’s Risk assessment process
6. Evaluate if management has designed and implemented risk • Information system
management capabilities. • Monitoring controls
7. Assess management’s efforts to monitor overall company risk • The Control Environment
management performance and to improve continuously the firms
capabilities. The Control Environment
8. See to it that best practices as well as mistakes are shared by all. This Overall attitude, awareness, and actions of directors and
involves regular communication of results and feedbacks to all concerned. management regarding the internal control system.
9. Assess regularly the level of sophistication of the firm’s risk management • Includes:
system 1. Communication and enforcement of integrity and ethical values
10. Hire expert when needed. 2. Commitment to competence
3. Participation by TCWG
4. Management’s Philosophy and Operating Style
5. Organizational Structure
6. Assignment of Authority and Responsibility
7. Human Resources Policies and Procedures

Entity’s Risk Assessment Process

Is the identification, analysis, and management of risks pertaining to the
preparation of financial statements
Risks arise from:
• Changes in operating environment
• New Personnel Monitoring Controls
• New or revamped information system A process that an entity uses to assess the quality of internal control
• Rapid Growth overtime
• New Technology Includes:
• New business models, products or activities • Evaluating the design and operation of internal control
• Corporate restructuring • Communicating information about strengths and weaknesses
• Expanded Foreign operations • Recommendation of actions to improve internal control
• New Accounting pronouncements

Information System
- Consists of infrastructure (physical and hardware components), software,
people, procedures and data

- Information systems encompasses methods and records that:

1. identify and record all valid transactions
2. describe on a timely basis the transactions in sufficient detail to permit
proper classification of transactions for financial reporting
3. measure the value of transactions in a manner that permits recording
their proper monetary value in the financial statements
4. determine the time period in which trend transactions occur to permit
occurred to permit recording of transactions in the proper accounting period
5. present properly the transactions and related disclosures in the financial
statement

Control Activities
Are the policies and procedures that help ensure that management
directives are carried out

CONCEPTUAL FRAMEWORK OF CORPORATE GOVERNANCE
OVERVIEW
The purpose of corporate governance is to help build an environment of
trust, transparency and accountability necessary for fostering long-
term investment, financial stability and business integrity, thereby
supporting stronger growth and more inclusive societies.
There is no single authority regulating corporate governance. Its principles
evolve overtime addressing the needs of the industry which may vary
among jurisdictions. Globalization, the treatment of investors and major
corporate scandals have been major driving forces behind corporate
governance developments.
Course Objectives
After studying this module, you should be able to
 Define and explain the meaning of corporate governance;
 Discuss the implications of the separation of ownership and control;
 Analyze the purposes and objectives of corporate governance;
 Describe the decision authority and incentives of shareholders, boards
of directors, and top management;
 Recognize the impact of organizational culture on the overall control
environment and individual engagement risks and controls;
 Describe and compare the essentials of rules and principles-based
approaches to corporate governance, including the comply or explain
principle; and
 Explore the objectives, content, and limitation of various codes of
corporate governance intended to apply to multiple national
jurisdictions.
CORPORATE GOVERNANCE DEFINITION
Corporate governance means to steer an organization.
Governance comes from the Latin word “gubanare” which means “to
steer.”
CORPORATE GOVERNANCE DEFINITION
 Corporate governance is the system by which businesses are directed
and controlled.
 Corporate governance is the system of stewardship and control to
guide organizations in fulfilling their long-term economic, moral, legal
and social obligations towards their stakeholders.
 Corporate governance is a system of direction, feedback and control
using regulations, performance standards and ethical guidelines to hold
the Board and senior management accountable for ensuring ethical
behavior – reconciling long-term customer satisfaction with
shareholder value – to the benefit of all stakeholders and society.
 Corporate Governance is about promoting corporate fairness,
transparency and accountability.
 Corporate governance deals with laws, procedures, practices and
implicit rules that determine a company’s ability to take informed
managerial decisions vis-à-vis its claimants - in particular, its
shareholders, creditors, customers, the State and employees.
 Corporate governance is a system of organizational control that defines
and establishes the responsibility and accountability of the major
participants in an organization.
 Corporate governance is the road map of an organization in order to
maximize shareholders’ wealth and protect stakeholders’ interests.
Based on the previous definitions, corporate governance best fits in an
organization where the following are present:
 Separation of ownership and control
 Stakeholders who have legitimate interests in the organization
 Underlying principles of corporate governance
Separation of Ownership and Control
Corporate governance has partly developed in response to the issues
arising from the corporate structure which separates ownership and control.
But what determines structure?
“Structure follows the strategy,” former president of a big water firm
espoused. For example, under transaction costs theory, the way the
company is organized or governed determines its control over transactions.
The strategy also sets the legal structure of an organization.
Forms of Organization:
 Sole proprietorship
 Partnership
 Corporation
This separation of ownership and control has led to agency problem since
corporation is managed by agents who may not operate it in the best
interest of the shareholders.
Finance theory, the basic assumption is that the primary objective for
companies is shareholders wealth maximization.
Agency theory takes the stance that management is likely to pursue their
own personal interests, rather than act as stewards.
Transactions cost theory considers that managers’ decisions are limited
by the understanding of alternatives that they have, that managers are
opportunistic, that they will organize their transactions to pursue their own
convenience.
Corporate governance counters these conflict by providing a system
that aligns the interest of the owners and managers and putting in
place a system of oversight.
Stakeholders
Stakeholders are persons or groups that have a legitimate interest in a
business's conduct and whose concerns should be addressed as a matter of
principle. A stakeholder can be anyone who has any type of stake in a
business.
There are several ways to classify stakeholders such as by Proximity,
Legitimacy, Claims, Voice, How much affected, How much affects, Degree
of Participation, Engagement, and Public Knowledge.
Each stakeholder has different claims from the organization.
Which of these conflicting interests are legitimate?
Stockholder theory (shareholder theory) argues that shareholders (as
principals) own the company. As owners, they alone have a legitimate claim
to influence over the company. It is the directors’ sole duty to maximize the
wealth of the shareholders.
Stakeholder theory, management has a duty of care, not just to the owners
of the company in terms of maximizing shareholder value, but also to the
wider community of interest, or stakeholders. Stakeholder theory proposes
corporate accountability to a broad range of stakeholders. In case of conflict
of interest, the managers are responsible to mediate between these different
stakeholders’ interest.
Fernando Zobel De Ayala, President & COO of Ayala Corporation said,
“We do not work in isolation. [It is] important to support the very ecosystem
that makes us successful.”
Mendelow Matrix
Mendelow classifies stakeholders on a matrix whose axes are power held
and likelihood of showing an interest in the organization’s activities.

Key players are found in Segment D. The organization’s strategy must be
acceptable to them, at least. An example would be a major customer. These
stakeholders may participate in decision-making.
Stakeholders in Segment C must be treated with care. They are capable of
moving to Segment D. They should therefore be kept satisfied. Large
institutional shareholders might fall into Segment C.
Stakeholders in Segment B do not have great ability to influence strategy,
but their views can be important in influencing more powerful stakeholders,
perhaps by lobbying. They should therefore be kept informed. Community
representatives and charities might fall into Segment B.
Minimal effort is expended on Segment A. An example might be a
contractor's employees.
Underlying Principles of Corporate Governance
Good corporate governance allows company to reap the full benefits of
international and local capital markets, improve investors’ confidence,
reduce cost of capital, and induce stable sources of financing.
However, there is no one size fits all framework of corporate
governance. Rather, it must be principles-based to allow a company
certain degree of flexibility in shaping its own best practices based on the
company’s age, size, complexity, extent of internal operations, and other
factors. Smaller companies may consider the cost and benefit of
implementing certain policies and procedures or decide that those are less
relevant in their case.
According to Teresita J. Herbosa, Chairperson of Securities and
Exchange Commission,
“strong corporate governance is founded on the principles of fairness,
accountability, and transparency.”
Underlying Principles of Corporate Governance
Fairness means equal treatment. This principle requires that everyone who
has legitimate interest in the company must be taken into account and their
rights and views be respected.
Corporate accountability means acceptance of full responsibility for the
powers and authority granted to those charged with governance and of
obligation to explain one’s action in carrying out its responsibilities. It
requires the board to present assessment of the company’s position and
how the company is achieving its objectives.
Transparency means open and clear, timely and accurate disclosure of
relevant information, financial or non-financial, to shareholders and other
stakeholders, as well as not concealing material information. Transparency
reduces the information gap between directors and stakeholders. It ensures
that stakeholders can have confidence in the decision-making and
management processes of a company. It can come in the form of annual And while corporate governance is a flexible concept, it must always adhere
report or well-documented policies that reader can understand. to principles consistent with the wide interests of stakeholders. In this
manner, each stakeholder’s action is guided by common principles, which
Guided by these principles, the SEC adopted the Code of Corporate action balances shareholders’ interests.
Governance for Public Companies and Registered Issuers (the Code) to
promote the developments of a strong corporate governance culture and
keep abreast with recent developments in corporate governance best
practices. The Code is consistent with the G20/OECD Principles of
Corporate Governance and other internationally recognized corporate Finally, it is the view of the author that corporate governance should address
governance principles. the issues arising from separation of ownership and control, balancing
stakeholders’ interest, and the adoption itself of corporate governance
The G20/OECD Principles of Corporate Governance laid down the six principles.
building blocks for a sound corporate governance framework.
- END OF DISCUSSION -
1. Ensuring the basis for an effective corporate governance framework
2. The rights and equitable treatment of shareholders and key ownership
functions
3. Institutional investors, stock markets, and other intermediaries
4. The role of stakeholders
5. Disclosure and transparency
6. The responsibilities of the board

The author submits the principle of shared responsibility and accountability

among shareholders, board directors, and other stakeholders. Corporate
governance is primarily about how the board steers the company. However,
the shareholders have the power to elect directors and remove them
when directors contravene their duties or act contrary to the
principles, values, and ethics of the company. The shareholders must
exert effort and be held accountable in the long-term value creation for all
shareholders. The shareholders’ role cannot be undermined.

In addition, the interests of the stakeholders create the ecosystem within

which the company operates. Hence, their role is to raise their voices to the
company, and their voices should be heard.

SEC CODE OF CORPORATE GOVERNANCE
The Securities and Exchange Commission (SEC) adopted the following:
- Code of Corporate Governance for Publicly Listed Companies (SEC
Memorandum Circular No. 19, series of 2016)
- Code of Corporate Governance for Public Companies and Registered
Issuers (SEC Memorandum Circular No. 24, series of 2019)
The Code is consistent with the G20/OECD Principles of Corporate
Governance and other internationally recognized corporate governance
principles.
It consistent with the principle of proportionality, Recommendations
(objective criteria) on how the Principles are applied vary among different
types of companies such as publicly listed companies, public companies,
and registered issuers. These differences, if any, are highlighted as the
Principles and Recommendations are discussed.
Publicly listed companies shall cover only those companies whose equity
securities are listed on the Philippines Stock Exchange.
Public company refers to a company with assets of at least P50 million and
having 200 or more shareholders holding at least 100 shares of equity
securities.
Registered issuer refers to a company that
1. issues proprietary and/or non-proprietary shares/certificates;
2. issues equity securities to the public that are not listed in an Exchange; or
3. issues debt securities to the public that are required to be registered to
the SEC, whether or not listed in an Exchange.
Comply or Explain
The adoption of comply or explain approach is to address the perceived
over regulation of SEC.
Under the “comply or explain” operative principle, compliance with the Code
is not mandatory. But it is mandatory to submit to SEC the company’s
annual corporate governance reports and disclose any deviations from the
Recommendations of the SEC. Such reports that shall be available to the
public, including the company’s shareholders and other stakeholders.
This approach combines voluntary compliance with mandatory disclosure. It
is not a rigid set of rules. Rather, it is principles-based which allows
company to implement alternative corporate governance practices, which
are justified in particular circumstances. When a Recommendation is not
complied with, the company must disclose and describe this non-
compliance, and explain how the overall Principle is being achieved. The
alternative should be consistent with the overall Principle.
The Code is designed to allow companies some flexibility in establishing
their own corporate governance practices. This is consistent with the
principle of proportionality where the SEC addresses specific segments of
the corporate sector, which may be differentiated on the basis of company
type, size, access to public funds and risk profile, among others. Smaller
companies may decide that the costs of some of the provisions outweigh the
benefits or are less relevant in their case.
Course Objectives
After studying this module, you should be able to
- Explore the objectives, content, and limitations of SEC Code of Corporate
Governance intended to apply to domestic corporations;
- Explain the underlying principles adopted by SEC Code of Corporate
Governance towards a more effective corporate governance framework;
- Explain and evaluate the roles and responsibilities of those charged with
governance, the importance of board committees in corporate governance
The SEC Code of Corporate Governance
16 principles under 5 broad categories
1. The board’s governance responsibilities
- Establishing a competent board
- Establishing clear roles and responsibilities of the board
- Establishing board committees
- Fostering commitment
- Reinforcing board independence
- Assessing board performance
- Strengthening board ethics
2. Disclosure and transparency
- Enhancing company disclosure policies and procedures
- Strengthening the external auditor’s independence and improving audit
quality
- Increasing focus on non-financial and sustainability reporting
- Promoting a comprehensive and cost-efficient access to relevant
information
3. Internal control system and risk management frameworks
- Strengthening the internal control system and risk management systems
4. Cultivating a synergic relationship with shareholders/ members
- Promoting shareholder/member rights
5. Duties to stakeholders
- Respecting rights of stakeholders and effective redress for violation of
stakeholder’s rights
- Encouraging employees’ participation
- Encouraging sustainability and social responsibility
Establishing a Competent Board
The company should be headed by a competent, working board to foster the
long-term success of the corporation, and to sustain its competitiveness and
profitability in a manner consistent with its corporate objectives and the long-
term best interests of its shareholders and other stakeholders.
The Board should –
- be composed of directors with a collective working knowledge, experience
or expertise that is relevant to the company’s industry/sector.
- be headed by a competent and qualified Chairperson
- provide a policy on the training of directors
- have a policy on board diversity
- be assisted by a Corporate Secretary and a Compliance Officer
It is the shareholders’ duty to elect competent board of directors and remove
those who failed to maintain their qualifications. In addition, the corporation
may provide in its By-laws additional directors' or trustees' qualifications
consistent with the good corporate governance practices.
The Board should be headed by a competent and qualified Chairperson.
The Chairman shall possess all the qualifications and none of the
disqualifications of a director.
The Company should provide a policy on the training aimed to promote
effective board performance and continuing qualification of the directors in
carrying-out their duties and responsibilities.
It is suggested that the orientation program for first-time directors, in any
company, be for at least eight hours, while the annual continuing training be
for at least four hours.
New directors shall undergo at least eight-hour orientation program on the
Corporation’s business and corporate structure, vision and mission,
corporate strategy, Governance Codes and Policies, Articles, By-Laws,
Company’s Manual of Corporate Governances, the Charters, the SEC-
mandated topics on governance matters and other matters essential for the
effective performance of their duties and responsibilities.
Incumbent directors shall attend a four-hour annual continuing training
program involving courses on corporate governance at least once a year. It
involves courses on corporate governance matters relevant to the company,
including audit, internal controls, risk management, sustainability and
strategy.
The Board should have a policy on board diversity.
Diversity is the variation of social and cultural identities among people
existing together in a defined employment or market setting. A board
diversity policy considers diversity in gender, age, ethnicity, culture, skills,
competence and knowledge. On gender diversity policy, a good example is
to increase the number of female directors, including female independent
directors.
he Board should be assisted in its duties by a Corporate Secretary, who
should
- be a resident and citizen of the Philippines.
- not be a member of the Board of Directors
- be a separate individual from the Compliance Officer
- annually attend a training on corporate governance
The Board should be assisted in its duties by a Corporate Secretary, who
should
- have a working knowledge of the operations of the Company
- possess appropriate administrative, interpersonal and legal skills,
- be aware of the laws, rules and regulations necessary in the performance
of his duties or responsibilities, and
- have at least an understanding of basic financial and accounting matters.
The Board should ensure be assisted in its duties by a Compliance Officer,
who should
- not be a member of the Board of Directors
- should annually attend a training on corporate governance.
- have a rank of Senior Vice President or an equivalent
-position with adequate stature and authority in the corporation
Establishing Clear Roles and Responsibilities Of The Board
The fiduciary roles, responsibilities and accountability of the Board as
provided under the law, the company’s articles and by-laws, and other legal
pronouncements and guidelines should be clearly made known to all
directors as well as to stockholders and other stakeholders.
The Board is collectively responsible for the sustainable long-term
shareholder value of the institution, sustain its competitiveness, profitability
and industry leading position in a manner consistent with its corporate
objectives.
The Board members should act on a fully informed basis, in good faith, with
due diligence and care, and in the best interest of the company and all
shareholders.
The elements of fiduciary duty of board members are the duty of care
(which includes the duty of obedience and duty of diligence) and the duty
of loyalty.
Duty of obedience requires compliance with law, rules, and court orders.
The directors or trustees elected shall perform their duties as prescribed by
law, rules of good corporate governance, and bylaws of the corporation.
Directors, trustees, and officers have the duty to act intra vires and within
authority.
Under duty of diligence, directors, trustees, and officers are required to
exercise good faith and due care in the performance of their functions,
otherwise, they shall be held liable.
The duty of loyalty mandate that directors/trustees should not give
preference to their own personal amelioration by taking the opportunity
belonging to the corporation.
The Board should oversee the development of and approve the company’s
business objectives and strategy, and monitor their implementation, in order
to sustain the company’s long-term viability and strength.
The Board should be responsible for ensuring and adopting an effective
succession planning program for directors, key officers and management.
The smooth and efficient transition of company leadership to highly
competent and qualified individuals is the goal of succession planning. This
will ensure growth and a continued increase in the shareholders’ value.
Directors shall not receive any compensation, as such, except for
reasonable per diem, unless such compensation is provided in the By-Laws
or granted by a vote of the stockholders representing at least a majority of
the outstanding capital stock of the Company. The Directors shall not decide
on their own compensation, other than per diem.
The Board should have a formal and transparent board nomination and
election policy. The Committee may use external sources, such as
professional search firms, director databases and/or other reputable
external sources to further enhance the search for and widen the base of
potential nominees. The Committee shall assist the Board in making an
assessment of the effectiveness of the processes and procedures in the
nomination, election and replacement of a director.
The Board should have the overall responsibility in ensuring that there is a
group-wide policy and system governing related party transactions (RPTs)
and other unusual or infrequently occurring transactions, particularly those
which pass certain thresholds of materiality. The policy should include the
appropriate review and approval of material or significant RPTs, which
guarantee fairness and transparency of the transactions. The policy should
encompass all entities within the group, taking into account their size,
structure, risk profile and complexity of operations.
The Management is primarily accountable to the Board for the operations of
the Company. In the selection process, fit and proper standard should be
applied. In this regard, the following shall be considered: integrity, probity,
physical and mental fitness, competence, relevant education or training;
possession of competencies relevant to the job, such as technical expertise
and experience in the company, skills, diligence and independence of mind,
and sufficiency of time to fully carry out responsibilities.
The Board shall appoint the executive officers who are the:
- President or the Chief Executive Officer,
- the Vice-Presidents (or their equivalent roles in the Company structure),
- the Treasurer and/or the Chief Finance Officer (CFO),
- Chief Risk Officer,
- Chief Compliance Officer,
- the Corporate Secretary, and
- Chief Audit Executive.
The Board should establish an effective performance management
framework that will ensure that the Management, including the Chief
Executive Officer, and personnel’s performance is at par with the standards
set by the Board and Senior Management.
The Board should oversee that an appropriate internal control system is in
place, including setting up a mechanism for monitoring and managing
potential conflicts of interest of Management, board members, and
shareholders. The Board should also approve the Internal Audit Charter.
The Board should oversee that a sound enterprise risk management (ERM)
framework is in place to effectively identify, monitor, assess and manage
key business risks. The risk management framework should guide the
Board in identifying units/business lines and enterprise-level risk exposures,
as well as the effectiveness of risk management strategies.
The Board should have a Board Charter that formalizes and clearly states
its roles, responsibilities and accountability in carrying out its fiduciary
duties. The Board Charter should serve as a guide to the directors in the
performance of their functions and should be publicly available and posted
on the company’s website.
Establishing Board Committees
The Revised Corporation Code allows the Board to create Executive
Committee and other special committees, which it can delegate its functions
but not its responsibilities. It is a good governance practice to establish
board committees that focus on specific board functions to aid in the optimal
performance of its roles and responsibilities.
The Board may establish the following committees:
- Audit Committee
- Corporate Governance Committee
- Board Risk Oversight Committee
- Related Party Transactions Committee
- Nomination Committee
- Remuneration Committee
- Committee of Inspectors of Ballots and Proxies
The Board may establish the following committees:
- Finance Committee
- Technology Strategy Committee
- Technical Support to Committees
If the bylaws so provide, the board may create an executive committee.
In the absence of a provision in the by-laws, the board, by itself, cannot
create an executive committee.
If the executive committee was not validly constituted, the members thereof
maybe considered de facto officers.
The Board should establish an Audit Committee to enhance its oversight
capability over the company’s financial reporting, internal control system,
internal and external audit processes, and compliance with applicable laws
and regulations.
The Board should establish a Corporate Governance Committee that
should be tasked to assist the Board in the performance of its corporate
governance responsibilities, including the functions that were formerly
assigned to a Nomination and Remuneration Committee. It should be
composed of at least three members, all of whom should be independent
directors, including the Chairman.
Subject to a corporation’s size, risk profile and complexity of operations, the
Board should establish a separate Board Risk Oversight Committee
(BROC) that should be responsible for the oversight of a company’s
Enterprise Risk Management system to ensure its functionality and
effectiveness.
Subject to a corporation’s size, risk profile and complexity of operations, the
Board should establish a Related Party Transaction (RPT) Committee,
which should be tasked with reviewing all material related party transactions
of the company and should be composed of at least three non-executive
directors, two of whom should be independent, including the Chairman.
The Nomination Committee shall be primarily tasked with the duty of
implementing a formal and transparent board nomination and election policy
that should include how it accepts nominations from the shareholders,
including minority and non-controlling, and how it reviews the qualifications
of nominated candidates.
The Remuneration Committee is primarily tasked with the establishment
and implementation of a formal and transparent procedure and policy for
determining the remuneration of directors and officers that is consistent with
the Company’s culture and strategy as well as the business environment in
which it operates.
The Board shall appoint three (3) persons (who need not be stockholders) to
act as the Committee of Inspectors of Ballots and Proxies which shall be
empowered to pass on the validity of proxies.
The Committee of Inspectors of Ballots and Proxies shall be guided by
existing laws, and rules and regulations of the SEC regarding proxies. The
term of office of the Committee members shall be fixed by the Board. In the
event of vacancy in the Committee membership, the Board may appoint
another member to fill such vacancy.
The Finance Committee shall have the principal oversight responsibility
with respect to the company’s capital allocation process, financial operation,
and its treasury-related activities and policies. The Finance Committee shall
define its own charter and fix its own rules of procedures. The Finance
Committee shall be responsible for reviewing and evaluating the financial
affairs of the Corporation from time to time.
All established committees should be required to have ‘Committee
Charters’ stating in plain terms their respective purposes, memberships,
structures, operations, reporting standards for evaluating the performance of
the Committees. It should also be fully disclosed on the company’s website.
The Committee Charter clearly defines the roles and accountabilities of
each committee to avoid any overlapping functions, which aims at having a
more effective board for the company. This can also be used as basis for
the assessment of committee performance.
Fostering Commitment
The Board shall hold regular meetings on the date and time schedules in the
by-laws. Otherwise, the meetings shall be held monthly. The Board shall
convene for special meetings when required by business exigencies.
Independent and non-executive directors may concurrently serve in Boards
of other companies, provided, at any given time, it will not exceed
- Five publicly listed companies,
- Ten public companies and/or registered issuers, or
- Five public companies and/or registered issuers if the director also sits in
at least three publicly listed companies
A company may provide a policy for the directorship limits of executive
directors. A company may also consider directorship in related companies
such as subsidiaries, affiliates, parent corporation, and affiliates and
subsidiaries of the parent corporation as one or exclude those from the
limitations in the number of directorships.
Reinforcing Board Independence
The Board should endeavor to exercise objective and independent judgment
on all corporate affairs.
Independence of the board rests on the proper mix of executive and non-
executive directors, on the separation of the positions of Chairperson and
Chief Executive Officers, and on the proper disclosure of adverse interests
of directors affecting the corporation.
The right combination of non-executive directors, which include independent
directors, and executive directors, ensures that no director or small group of
directors can dominate the decision-making process.
Executive director is a director who has executive responsibility of day-to-
day operations of a part or the whole of the organization. Non-executive
director is a director who has no executive responsibility and does not
perform any work related to the operations of the corporation. Independent
director is a person who is independent of management and the controlling
shareholder and is free from any business or other relationship which could,
or could reasonably be perceived to, materially interfere with his exercise of
independent judgment in carrying out his responsibilities as a director.
The position of Chairman of the Board and President/CEO shall be held by
separate individuals, who are not related to each other, and each shall have
clearly defined responsibilities.
A director with a material or potential interest in any transaction affecting
corporation should fully disclose his adverse interest, abstain from taking
part in deliberations for the same and recuse from voting on the approval of
the transaction.
The contract of the corporation with a self-dealing director/trustee, his
spouse, or relative within fourth civil degree of consanguinity or affinity is
voidable. However, the contract is perfectly valid if all the following
conditions are present.
- The presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such
meeting;
- The vote of such director or trustee was not necessary for the approval of
the contract;
- The contract is fair and reasonable under the circumstances;
- In case of corporations vested with public interest, material contracts are
approved by at least a majority of the independent directors voting to
approve the material contract; and
- In case of an officer, the contract has been previously authorized by the
board of directors.
- If any of the above conditions are not present, the corporation, through its
board of directors/trustees, can annul the contract in a judicial proceeding
within the prescriptive period, otherwise, the contract remains in force.
However, even if the corporation decides to annul the contract, the
stockholders/members can ratify the contract with self-dealing
director/trustee:
- By stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or of at least two-thirds (2/3) of the members in a meeting
called for the purpose
- Full disclosure of the adverse interest of the directors or trustees involved
is made at such meeting and
- The contract is fair and reasonable under the circumstances.
Fairness typically requires that the transaction reflect terms one would
expect in an arm’s length transaction.
For contracts with self-dealing officers, stockholders/members ratification is
not required. It is within the power of the board to ratify the subject
contracts.
Contracts with interlocking directors are likewise subject to limitations.
Interlocking directorship by itself is not prohibited. But the by-laws may
prohibit interlocking directorship. There is an interlocking director when one
of the directors in one corporation is also a director in another corporation.
The contract entered between such corporation is valid but subject to the
following rules:
- the contract is valid or shall not be invalidated on the sole ground of
interlocking directorship; provided that: contract is not fraudulent and the
contract is fair and reasonable
- if the interest of the interlocking director in one (1) corporation is
substantial and the interest in the other corporation or corporations is merely
nominal, the rules on self-dealing directors shall apply. Stockholding
exceeding twenty percent (20%) of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.
Each director has a duty of loyalty to the corporation. Breach of this loyalty
will subject the director to liability. Under the Doctrine of Corporate
Opportunity, unless ratified by stockholders, a director shall refund to the
corporation all the profits he realizes on a business opportunity which:
- The corporation is financially able to undertake;
- From its nature, is in line with corporation’s business and is of practical
advantage to it; and
- The corporation has an interest or a reasonable expectancy.
The rule applies even if the director risked one's own funds in the venture. If
the act has been ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the outstanding capital stock, the
director is excused from remitting the profit realized.
The doctrine is not applicable to the following instances:
- When a director engages in a distinct enterprise of the same general class
of business as that which his corporation is engaged in, so long as he acts
in good faith;
- The opportunity is one which is not essential to the corporation’s business,
or employment of company’s resources, or where the director or officer
embracing opportunity personally is not brought into direct competition with
the corporation; or
The doctrine is not applicable to the following instances:
- When the property or business opportunity has ceased to be a “corporate
opportunity” and has transformed into a “personal opportunity”. In such a
case the corporation is definitely no longer able to avail itself of the
opportunity, which may “arise from financial insolvency”, or from legal
restrictions, or from any other factor which prevents it from acting upon the
opportunity for its own advantage.
The doctrine is not applicable to the following instances:
- If the action was made after the resignation of the director.
- When two related corporations are involved even if there is interlocking
directorship.
The best measure of the Board’s effectiveness is through an assessment
process. The Board should regularly carry out evaluations to appraise its
performance as a body and assess whether it possesses the right mix of
backgrounds and competencies.
The Board should conduct an annual self-assessment of its performance,
including the performance of the Chairman, individual members and
committees. For publicly listed companies, the annual self-assessment
shall, as practicable, be supported by an external facilitator every three
years.
Strengthening Board Ethics
Members of the Board are duty-bound to apply high ethical standards,
taking into account the interests of all stakeholders.
The Company shall adopt, implement and monitor compliance with:
A. a Code of Business Conduct and Ethics that provides the general
standards for professional and ethical behavior for the Company, its
Directors, Officers, Executives and employees in their internal and external
dealings, and
B. policies implementing the Code of Business Conduct and Ethics,
governing, among others:
- Conflict of Interest;
- Gift-Giving and Anti-Corruption;
- Gifts, Entertainment and Sponsored Travel;
- Whistleblowing; and
- Supplier/Contractor Relations.
Enhancing Company Disclosure Policies and Procedures
The company should establish corporate disclosure policies and procedures
that are practical and in accordance with best practices and regulatory
expectations.
All corporations are required to submit to SEC the reportorial
requirements required under SEC Memorandum Circular No. 2, series
of 2020. In addition to the SEC requirements, publicly listed companies are
required to comply with the PSE Disclosure Rules.
Section 23 of the Securities Regulation Code prescribed that a director or an
officer of the issuer of the security, shall file, at the time either such
requirement is first satisfied or within ten (10) days after he becomes such a
beneficial owner, director, or officer, a statement with the SEC and to the
PSE and the PDEX (if the security is listed for trading) of the amount of all
equity securities of such issuer of which he is the beneficial owner, and
within ten (10) days after the close of each calendar month thereafter, if
there has been a change in such ownership during such month.
The company’s corporate governance policies, programs and procedures
should be contained in its Manual on Corporate Governance, which should
be submitted to the regulators and posted on the company’s website.
In addition, publicly listed companies should fully disclose all relevant and
material information on individual board members and key executives to
evaluate their experience and qualifications and assess any potential
conflicts of interest that might affect their judgment.
Strengthening the External Auditor’s Independence and Improving
Audit Quality
The company should establish standards for the appropriate selection of an
external auditor, and exercise effective oversight of the same to strengthen
the external auditor’s independence and enhance audit quality.
It is the responsibility of the Audit Committee to
- recommend the appointment, reappointment, removal, and fees of the
external auditor
- assessing the integrity and independence of external auditors
- disclose the nature of non-audit services performed by its external auditor
Financial Statements covered by SRC Rule 68 shall be audited by
independent auditors who are duly registered with the Board of Accountancy
(BOA) of the Professional Regulation Commission (PRC) in accordance with
the rules and regulations of said professional regulatory bodies. A
corporation with financial statements audited by an independent auditor who
is not registered with the BOA shall be subject to appropriate fines.
Increasing Focus on Non-Financial and Sustainability Reporting
The company should ensure that material and reportable non-financial
and sustainability issues are disclosed.
The Board should have a clear and focused policy on the disclosure of
non-financial information, with emphasis on the management of
economic, environmental, social and governance (EESG) issues of its
business, which underpin sustainability. Companies should adopt a
globally recognized standard/framework in reporting sustainability and non-
financial issues.
On February 15, 2019, SEC issued the Sustainability Reporting Guidelines
for Publicly Listed Companies (Memorandum Circular No. 4, series of 2019).
The Board shall be instrumental in maintaining the standards espoused in
the Corporation’s sustainability framework and the policies thereof.
Promoting a Comprehensive and Cost-Efficient Access to Relevant
Information
The company should maintain a comprehensive and cost-efficient
communication channel for disseminating relevant information. This channel
is crucial for informed decision-making by investors, stakeholders and other
interested users.
Companies should have a website, at the very least.
A company website should contain, among others:
- the Manual on Corporate Governance,
- Annual Corporate Governance Report,
- Board Charter,
- Committee Charters,
- the company’s Code of Business Conduct and Ethics.
Publicly listed companies should include media and analysts’ briefings
as channels of communication.
Companies may also utilize participation in investor conferences, adhoc
briefings, roadshows, conference calls and one-on-one meetings; and timely
official disclosures via PSE EDGE. The Corporation may also use other
available media channels to extend communication to stakeholders, as
applicable.
Strengthening the Internal Control System and Enterprise Risk
Management Framework
To ensure the integrity, transparency and proper governance in the
conduct of its affairs, the company should have a strong and effective
internal control system and enterprise risk management framework.
The Company should have an adequate and effective internal control
system and an enterprise risk management framework in the conduct of its
business, taking into account its size, risk profile and complexity of
operations.
Promoting Shareholder Rights
The company should treat all shareholders fairly and equitably, and also
recognize, protect and facilitate the exercise of their rights.
It is the duty of the Board to promote stockholder rights, remove
impediments to the exercise of stockholder rights and provide effective
redress for violation of their rights.
The Board should ensure that basic shareholder rights are disclosed in the
Manual on Corporate Governance and on the company’s website. It is the
responsibility of the Board to adopt a policy informing the shareholders of all
their rights.
Shareholders’ rights relate to the following, among others:
A. Right to participate in the management by exercising the right to vote.
Corollary, the right to vote carries the following rights of stockholders:
- Right to nominate candidates to the Board of Directors;
- Right to participate in the approval of certain corporate acts
Shareholders’ rights relate to the following, among others:
Right to nominate candidates to the Board of Directors;
- Right to be informed of the nomination and removal process;
- Right to be informed of the voting procedures that would govern the
Annual and Special Shareholders’/Members Meeting.
- Right to elect directors
- Right to remove directors
Right to participate in the approval of certain corporate acts
- Right to notice of meetings and right to attend meetings
- Right to appoint a proxy
- Right to Propose the Holding of Meetings and to Propose Agenda Items
Shareholders’ rights relate to the following, among others:
B. Appraisal Rights
C. Right to income and assets of the corporation
- Right to Dividend;
- Proportionate participation in the distribution of assets in liquidation
D. Right to protect/transfer ownership
- Right to issuance of stock certificate for fully paid shares
- Right to transfer of stock in corporate books
- Pre-emptive rights;
- Right of first refusal, if granted
E. Right to information
- Right to inspect books and records
- Right to be furnished of the most recent financial statement/financial
report
- Right to be notified of certain corporate acts
F. Remedies for infringement of Shareholder rights such as individual suit,
representative suit, derivative suit, or alternative dispute resolution
Respecting Rights of Stakeholders and Effective Redress for Violation
of Stakeholder’s Rights
The rights of stakeholders established by law, by contractual relations and
through voluntary commitments must be respected. Where stakeholders’
rights and/or interests are at stake, stakeholders should have the
opportunity to obtain prompt effective redress for the violation of their rights.
The Board should identify the company’s various stakeholders and promote
cooperation between them and the company in creating wealth, growth
and sustainability.
Stakeholders in corporate governance include, but are not limited to,
customers, employees, suppliers, shareholders, investors, creditors, the
community the company operates in, society, the government, regulators,
competitors, external auditors, etc.
In formulating the company’s strategic and operational decisions affecting its
wealth, growth and sustainability, due consideration is given to those who
have an interest in the company and are directly affected by its operations.
The Board should adopt a transparent framework and process that allow
stakeholders to communicate with the company and to obtain redress for
the violation of their rights.

Encouraging Employees’ Participation

A mechanism for employee participation should be developed to create a

symbiotic environment, realize the company’s goals and participate in its
corporate governance processes.

Encouraging Sustainability and Social Responsibility

he company should be socially responsible in all its dealings with the

communities where it operates. It should ensure that its interactions serve
its environment and stakeholders in a positive and progressive
manner that is fully supportive of its comprehensive and balanced
development.

The company should recognize and place an importance on the

interdependence between business and society and promote a
mutually beneficial relationship that allows the company to grow its
business, while contributing to the advancement of the society where it
operates.

Sustainable development means that the company not only complies with
existing regulations, but also voluntarily employs value chain processes that
takes into consideration economic, environmental, social and governance
issues and concerns. In considering sustainability concerns, the company
plays an indispensable role alongside the government and civil society in
contributing solutions to complex global challenges like poverty, inequality,
unemployment and climate change.